Capitalism's Kryptonite

Too Big Too Fail is Capitalism's Kryptonite. Without creative destruction we have total economic destruction. I can't say it better than that. Capitalism depends on this very simple notion of creative destruction. If risk challenged and poorly managed financial firms are not allowed to go belly up or fail, the overall risk to the entire economy is threatened.

Every single time the idea of greater regulation is tossed around we hear the same rhetoric from the financial sector mafia. If you regulate us? The economy will suffer. If you regulate us? Credit will become scarce. If you regulate us? You will ruin our competitiveness. All of these excuses are just that. Excuses. The economy is already in the toilet, consumer credit other than last months small increase is contracting. As for global competition? The recent problems in Europe should take care of that.

The biggest reason they give for TBTF is that the giant economies of scale argument. This is totally preposterous. They just want to protect their bonus pool. As these giant banks have grown over the last 15 years, most of the efficiencies and profits have flowed to the executive ivory towers and shareholders. Where is the benefit for the real economy of having BOFA, CITI, JP, and Wells owning some 2/3rds of customer deposits? The only efficiency was the somewhat lower costs that were passed onto consumers. This is hardly the type of efficiency that should bring TBTF as public policy.

The only reason they want TBTF is because its a get out jail/accountability free card. This is 100% opposite of what true capitalism should be.

The majority of financial experts didn't see the credit crisis coming. This is for good reason. They willfully missed it because business as usual was the order of the day. Everyone talks about "Black Swan" events, but was it? It was only a Black Swan event for the head in the sand crowd. There were many investors that saw this coming as evidenced by John Paulson getting short subprime via Goldman's Abacus vehicle. Anyone who says it was a Black Swan event is just taking an intellectual cop out. This is unacceptable. The idea that financial firms were helpless because LIBOR-OIS and the TED Spread was soaring is borderline criminal. This is what happens when you are in a both a liquidity and solvency crisis. It is very convenient to say its a liquidity crisis when in fact we all knew the banks were tapped out. The banks used terms like 10 standard deviation events, Black Swans, storm of the century to absolve themselves from reckless credit decisions. It was pure greed blinded by free market/rational ideology that led to the immense leverage inherent in the system.

Millions of honest hard working people who were downsized deserve better than what we have gotten from both the Bush and Obama Administrations.

Wall Street has made trillions from the Moral Hazard trade the last 15 years or so. Ever since LTCM, the coast has been clear.

http://tradersutra.blogspot.com/2009/03/how-ltcm-enabled-sub-prime-meltdown.html

When this trade comes to an end and it will the resulting pain will live on for tens of generations.

All great bubbles begin with a truly convincing shift in fundamentals and rhetoric. And many of them are all kept going by reckless lending on the part of Citigroup and its competitors, remember emerging markets in the 1970s and 1990s? US commercial real estate in the 1980s?  Finally US residential real estate in the last decade?

What are we asking for? What do we want from our elected officials? It's quite simple. We need to break up the banks and shrink their balance sheets down to a point where they can no longer hurt the economy if shit hits the fan.